No Likely Change to BI Policy Rate at 4.75% in 2H17

BI Guided Salient Global Risks That Demand Vigilance Going Forward

Bank Indonesia (BI) maintained its main policy rate (7-day reverse repo rate) at 4.75% for eight straight meetings, in line with our expectation. Similarly, the deposit facility and lending facility rate were both unchanged at 4.0% and 5.5% respectively. BI noted in the MPC statement that “the decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability, while supporting a continuous domestic economic recovery.” BI also highlighted some downside risks from the global environment, including the US Federal Reserve hiking federal funds rate (FFR) further and unwinding of its large balance sheet, uncertainties in UK after election outcome last week, as well as recent the potential decrease in commodity prices, especially oil.

Nevertheless, BI expected that Indonesia’s economy will likely continue to improve from 5% yoy in 2016 to between 5.0-5.4% range this year, supported by healthy domestic demand and robust performance from exports. BI also projected balance of payment to stay in surplus for second quarter this year. Last month, Indonesia’s long-term sovereign rating was upgraded by S&P to investment grade, and BI believed that this will attract more foreign capital inflows in the form of portfolio investment and direct investment, which will support surplus in capital and financial account in the balance of payment.

On inflation front, despite May inflation rising further to 4.3% yoy from 4.2% in April, BI noted that inflation will remain manageable and within their target of 3-5% this year. However, we believe that inflationary pressure is likely to continue in the next few months due to Ramadan and Eid fitr, attributed from higher consumer demand and rising food prices. For full year 2017, we maintained that Indonesia’s inflation will average around 4.3-4.5% (3.5% in 2016). With BI guiding in the latest MPC that they will continue to monitor global risks in 2017, we believe its key policy rate will remain at 4.75% throughout 2017.

Separately, on the external trade front, Indonesia’s export rose from 13.6% yoy in April to 24.1% yoy in May, higher than market expectations of 15.7%. The improvement in exports was reflected across the aboard. In exports of oil and gas category, manufacturing which has the largest share in the group jumped by 463% yoy in May (325.3% yoy in April), followed by mining (652.6%) and agriculture (553.3%). Meanwhile, imports also grew sharply by 24% yoy in May (10.5% yoy in April), where as a result, trade balance narrowed to US$0.5bn in May (US$1.3bn in April)

Source: Affin Hwang Research - 16 Jun 2017